Going for Growth 2021 – Italy

Italy

Many of Italy’s structural challenges – the significant divides across regions, age, gender and productivity, as well as high levels of public debt – have been compounded by the COVID-19 crisis. The key priority for the recovery is to enhance the public administration's effectiveness. This should include, in particular, public investment governance and improved co-ordination and implementation across different levels of government. This will be essential to effective utilisation of the funds available from the European Recovery and Resilience Facility (RRF) and realising the benefits of structural reforms.

Performance prior to the COVID-19 crisis

Economy: Percentage gap with respect to the population-weighted average of the highest 18 OECD countries in terms of GDP per capita (in constant 2015 PPPs).

Inequality: The Gini coefficient for disposable income measures the extent to which the distribution of disposable income among households deviates from perfect equal distribution. A value of zero represents perfect equality and a value of 100 extreme inequality. The latest available data for Italy is 2017.

Environment: Greenhouse gas (GHG) emissions include emissions or removals from land-use, land-use change and forestry (LULUCF). A high exposure to air pollution refers to above 10 μg/m3 of PM2.5.

An efficient public administration key for policy implementation

A central pillar of the recovery strategy is how to maximise the effect of the Next Generation EU Funds, especially for investment, which have the potential to boost long-term growth and employment. Success will depend on the ability to improve the implementation, management and prioritisation of quality public investment. An institutionalised framework for managing infrastructure spending – including maintenance budgets and project management – will enhance fiscal sustainability and planning and sustain public investment. Variations in regional implementation and the disincentives for coordination across levels of government must be overcome. Clarity on long-term core infrastructure priorities, based on their ability to raise growth and lower the cost of living and doing business, evaluated using cost-benefit analysis, could help crowd-in private investment (Panel A).

Improving the efficiency of the public administration

would strengthen the impact of such reforms, and amplify the response from the private sector to recovery measures. Judicial reforms to improve administrative processes and greater use of alternative dispute resolution mechanisms would lead to a fairer application of the law. Increased digitalisation can reduce informality, broaden the tax base and improve targeting of social benefits. Efforts to introduce user-friendly digital interfaces should be combined with a commitment to simplify administrative procedures across all levels of government. A clear timetable to streamline regulatory processes, prioritised based on their cost to businesses, and a clear delineation of responsibilities would facilitate implementation, lower uncertainty and costs. More uniform regulations across regions would reduce the costs to investing for local and foreign firms.

Vulnerabilities and areas for reform

The crisis risks compounding already low employment rates and further increasing inequality, particularly in the context of low skills and lifelong learning levels. Effective provision of education, public employment and labour market activation services can help mitigate skills and job-search mismatches, especially for youth and other vulnerable workers (Panel B). This requires overcoming obstacles to coordination across various levels and agencies of government, and consideration of funding priorities. At the same time, reducing the complexity of the tax system, broadening its base and continuing efforts to enhance tax administration would improve the efficiency and equity of the tax structure to better support employment and growth.

Small and medium-sized firms need to raise productivity and innovation to emulate top-performers. In 2020, a new package of generous incentives to support investment in digital technologies and R&D extended past measures of support. Nevertheless, a National Productivity Board could prioritise and drive policy action and accountability, strengthening the impact of innovation incentives and reduction of red tape.

Italy: Summary of Going for Growth priorities and recommendations

Recent progress on structural reforms

The social safety net has been radically improved with the citizen’s income scheme, which introduces higher benefits for households alongside stricter conditionality. The government enacted important reforms to improve tax compliance and in 2020 reduced the labour tax wedge. Support to R&D and digital investment was also extended. Past banking sector reforms and efforts to develop the secondary market for non-performing loans improved the state of the banking sector that is now better prepared to extend liquidity than during the Global Financial Crisis. Administrative and legislative reforms to the judicial process have been passed to reduce inefficiencies and improve the system’s resilience to an increase in bankruptcies.

DOWNLOAD